Tom Watson Sr. facing this situation in a pre-depression environment placed his job at risk. He defined his tenure as IBM’s Chief Executive Officer with the following statement, “If you want me to come in here and operate this business for the benefit of the business, I’ll do it, but I will not have anything to do with the operation of it from a stock standpoint.” He threatened to go to the press. With the NCR scandal still hanging over his head, the board could have easily removed him as general manager. Tom Watson Sr. stood his ground. He established in 1914 the principles that would guide his “The IBM” for almost ninety-seven years. With these principles he would return to his shareholders, through nine recessions and the Great Depression, a compound annual rate of growth of more than 20 percent over almost four decades. He managed the business not its stock. Ethical priorities bounded his actions. He was, as he would say over and over again during the Depression, building a business that would last forever. He prioritized the business first; he rewarded stockholders, customers and employees; he balanced the distribution of his corporation’s growing wealth between these three investors.
As Tom Watson Sr. beheld the desolation of the Great Depression he said of its cause, “A certain group of people in the United States tried an experiment. They tried the experiment of making a fortune without working, of making a fortune through the stock exchange. They extended the experiment until it exploded and all went down to earth.”
In the 1980’s IBMers should have queried the expectations of the markets and the IBM board. This chart highlights the rental revenue contribution to IBM’s total revenues. After a decade of amazing growth, it reached 13.4 billion and was sixty percent of the total revenue number. This revenue stream was liquidated in the early 80’s and then dropped as a separate revenue line item. A stable, consistent, significant, growing and highly profitable, rental revenue stream was scalpelled from the IBM balance sheet. IBM converted its annual one-dollar gold piece into a one-time, two-dollar paper note; and IBM’s revenue growth, already spectacular by any business standard, was injected with nitro. It flared and exploded; but the implosion was just around the corner awaiting a new CEO.
We spiked revenue; we openly discussed the “Hundred Billion Dollar IBM” by 1990; we invested in machinery, plants and people to match our blustery talk. As an administrator, I processed the paperwork for our customers to exchange the monthly rental check for a one-time purchase transaction; on the IBM Commission Desk I processed ever expanding commission checks; then as one of the first IBM Credit Corporation sales reps, I experienced the doubling and tripling of quotas with no increase in territory, no increase in product coverage and decreasing product prices. For IBM sales reps, it was the perfect storm. Long-time IBM sales friends left to sell real estate.
Nineteen-ninety was the signature year. It would take five years to regain that revenue pinnacle. IBM shed on average 30,000 jobs a year for six years dropping employment from 405,535 to 225,347. More friends left the business. Some moved themselves to central administrative locations; layoffs took the remainder. With the elimination of my management job, I became an IBM Systems Engineer. In sales I learned one secret to success—control expectations. As IBMers we should have asked;
1. What is the plan to replace this revenue stream?
2. Have we set expectations so high they can’t be met?
3. If we try to meet these expectations, what is the long-term effect?
As IBMers—employee-owners—we should have asked. Deaf ears greeted the few that did.
The market schooled us on the effects of uncontrolled expectations and crossing ethical boundaries.
That final question reveals that Columbo has figured it out. It is now only a matter of time.
• The Seemingly Inane Question
A new leader is at the helm of IBM. The market expectations have been set. Listening to her predecessor, it is all smooth sailing ahead. We should ask questions to check expectations and inspect for hubris. We ask, not to analyze the words but to hear their tone and tenor. Does it ring true?
• In 1914, Thomas J. Watson Sr. took over IBM.
• In 1964, IBM celebrated 50 years as “Fifty Years of Progress” at the New York World’s Fair.
• In 1989, IBM celebrated 75 years as "IBM, A Special Company - The Diamond Jubilee.”
• In 2011, IBM celebrated 97 years as "The IBM Centennial."
• In 2014, IBM should have celebrated its traditional centennial….and Watson’s integrity.
"Why did we celebrate the IBM Centennial three years early?"
The answer to this question would help us understand if we are more concerned with self-image or long-term success. It would answer if we are still of the character of the Watsons. More pragmatically, it would answer a nagging concern, “Was the extra bravado, higher media attention and maximized marketing needed to attain the 2011 earnings-per-share target? Did we pull out all the stops in 2011?” “If so, what is our 2012 plan?” “What if revenue falters or the acquisition strategy slows?” “What did we learn from the 80’s?”
Then again, maybe a simple question does have a simple answer.
• The Banter
We should continue, “No one wants another IBM of the 1980’s. Are we in control of the market’s expectations?”
The last time we failed to ask, one hundred and eighty thousand, one hundred and eighty-eight IBMers and their families experienced the effect. It was worldwide then, it would be again. The market is never a respecter of country.
• The Final Inquiry
I have retired from IBM. I am standing at the exit. Just one more question.
Are we operating the business for the sake of the business or from a stock standpoint?
Peter E. Greulich
Author, Speaker and Publisher
MBI Concepts Corporation